Recent studies have indicated that as many as 77% of 401(k) plans are not in compliance with applicable rules and regulations. Why such a high percentage? 401(k) plans fall under the jurisdiction of the Department of Labor (DOL) and the Internal Revenue Service, so there are overlapping rules and regulations. Typically, plan sponsors are conscientious, but the DOL has identified several areas to watch:

1. Plan document failure. OK, your company started a 401(k) plan and you have the big binder of documents to prove it. But are those documents up to date?  Recent amendments to your plan should have included the HEART act and the PPA Technical Corrections Act. One way to make sure you are current is to touch base with the plan service provider at least twice a year and ask if there are any changes you need to make. Most service providers have information on their websites, but it is nice to have confirmation from a real person that you are up to date. Another issue to watch: if you amend one section, other sections of the plan document need to agree to the amendment.
2. Failure to follow the terms of the plan document. Recent examples of problem areas include:

• Someone is laid off and comes back. Are they still a plan participant?
• What is the definition of a year of eligibility versus a year of service?
• Can someone over 59 ½ and still working for you take an in-service distribution?

All the answers are hidden in your plan document, but are sometimes hard to decipher. If you have questions regarding your 401(k), start with your document.  Your service provider and your auditor are also good references. Whenever you consult the document or a person for their advice, document the date, time and decision-making process.

The following issues are covered in your plan document, but are misunderstood so often they are worth a separate mention:

3. Know the definition of compensation. Use the definition in the plan, which could be different than Medicare wages or gross payroll. Proper initial set up in your payroll system is essential for this step. Special pays, bonuses or insurance deductions may have an effect.
4. Include all eligible employees. All plans have age and service requirements, and once an employee meets those definitions, s/he becomes a participant. Your service provider will ask for yearly census information, and it is a best practice to include all employees in your census information, even ineligible employees.  When you reconcile your census data to your annual payroll reports, many errors can be caught.
5. Follow the plan’s loan provisions. Can an employee have more than one loan at a time? What happens if an employee with an outstanding loan is terminated?  What interest rate is being charged? Many loans are going paperless, but you as administrator need to know that the service provider is following the plan’s procedures.
6. Follow the plan’s hardship withdrawal terms. Important: your definition of hardship and the DOL’s definition of hardship are notthe same! The hardship definition and the amount of the withdrawal are very specific in this area. If you are approving the withdrawal, make sure you know the rules.
7. Deposit elective deferrals on a timely basis. What is a timely basis? The official definition is “as of the earliest date on which such amounts can be reasonably segregated from the employer’s general assets.” For plans with fewer than 100 participants, there is a safe harbor time period for deposits made within 7 days after the date of the payroll deduction. What should larger plans do? Many use the IRS Form 941 Medicare and Social Security deposit rules, but the DOL has indicated that is not a safe harbor. We suggest the following:

• Come up with a formal procedure, such as a statement that you are using the same day as your 941 deposit.
• Consistently apply that date. Do not deposit funds early (on or before the pay date), as this demonstrates your capability to segregate funds sooner than your stated policy.

Communication between the company payroll manager, the TPA agent and the auditor can alleviate many compliance issues. Remember, that if your plan is over 100 participants at the beginning of the year, you will most likely need an audit. Please call our office and we will be happy to help.